(Objective#2)-To explain the Significance or Importance of the Labor Force or LF in a country’s economy: What is the Significance or Importance of the LF in any country’s economy? There are several reasons for the importance of the LF in a country’s economy: · The ratio of the # employed labor the # of unemployed labor tells us something about the health of the economy whether it’s performing well or poorly i.e. is the economy growing or stagnating? · If significant #s of people are unemployed and underemployed and are willing and able to work though unable to find jobs, it tells us that the economy is operating sub-optimally and therefore below its PPC. On the contrary, if all those who want to work can find work, it tells us that the economy may be operating at full employment i.e. on the economy’s PPC · The labor force particularly those with jobs are the creators of a country’s wealth and therefore the more people who have jobs, generally speaking whether full time jobs, part time jobs or self-employed, the more wealth created in a society and vice versa, · The greater the # of discouraged or marginalized workers i.e. those left out of the LF by the BLS each month/year, the more dismal the performance of the economy because it tells us that those without jobs have postponed their job search because of the difficulty to find jobs etc. · Likewise the # personas who are unemployed, underemployed and those who are considered by the BLS to be discouraged or marginalized workers help to clarify for us the levels of economic and social challenges (sufferings) of these groups at the macroeconomic level 2 (Objective#1)-To define and distinguish between the concepts of the Labor Force or LF and the Population of a country · Definition ofLF =#Employed + #Unemployed (actively seeking gainful Employment) · Definition of Population =the absolute # of individuals ( residents) who live within the geographical borders of a country · For example, in the US, the LF is an estimated 175 million persons whereas the population is an estimated 320 million persons. · Hence, the LF < Population or it’s a subset of the population of any country. Thus, we must ask and answer the question who are the members of a country’s population who are excluded from the LF? · Groups of Personas who are excluded from the US Labor Force: · •Children in the case of the US who are less than 16 years old, · •Retirees i.e. those workers in whatever categories of labor manual or professional who are retired from active work in the LF, · •People who are institutionalized such as prisoners, severely mentally ill etc, · •Housewives ie those whose labor services are mainly confined to housework or domestic chores (cooking, doing the laundry, shopping for grocery, etc.), · •Members of the Armed Forces (all branches of it, Navy, Air Force etc.) ie the reason why we refer to the LF as being Civilian, · •Severely handicapped individuals i.e. people who are pa ...

1. (Objective#2)-To explain the Significance or Importance of the
Labor Force or LF in a country’s economy:
What is the Significance or Importance of the LF in any
country’s economy?
There are several reasons for the importance of the LF in a
country’s economy:
· The ratio of the # employed labor the # of unemployed labor
tells us something about the health of the economy whether it’s
performing well or poorly i.e. is the economy growing or
stagnating?
· If significant #s of people are unemployed and underemployed
and are willing and able to work though unable to find jobs, it
tells us that the economy is operating sub-optimally and
therefore below its PPC. On the contrary, if all those who want
to work can find work, it tells us that the economy may be
operating at full employment i.e. on the economy’s PPC
· The labor force particularly those with jobs are the creators of
a country’s wealth and therefore the more people who have
jobs, generally speaking whether full time jobs, part time jobs
or self-employed, the more wealth created in a society and vice
versa,
· The greater the # of discouraged or marginalized workers i.e.
those left out of the LF by the BLS each month/year, the more
dismal the performance of the economy because it tells us that
those without jobs have postponed their job search because of
the difficulty to find jobs etc.
· Likewise the # personas who are unemployed, underemployed

2. and those who are considered by the BLS to be discouraged or
marginalized workers help to clarify for us the levels of
economic and social challenges (sufferings) of these groups at
the macroeconomic level
2
(Objective#1)-To define and distinguish between the concepts
of the Labor Force or LF and the Population of a country
· Definition ofLF =#Employed + #Unemployed (actively
seeking gainful Employment)
· Definition of Population =the absolute # of individuals (
residents) who live within the geographical borders of a country
· For example, in the US, the LF is an estimated 175 million
persons whereas the population is an estimated 320 million
persons.
· Hence, the LF < Population or it’s a subset of the population
of any country. Thus, we must ask and answer the question who
are the members of a country’s population who are excluded

3. from the LF?
· Groups of Personas who are excluded from the US Labor
Force:
· •Children in the case of the US who are less than 16 years old,
· •Retirees i.e. those workers in whatever categories of labor
manual or professional who are retired from active work in the
LF,
· •People who are institutionalized such as prisoners, severely
mentally ill etc,
· •Housewives ie those whose labor services are mainly
confined to housework or domestic chores (cooking, doing the
laundry, shopping for grocery, etc.),
· •Members of the Armed Forces (all branches of it, Navy, Air
Force etc.) ie the reason why we refer to the LF as being
Civilian,
· •Severely handicapped individuals i.e. people who are
paralyzed, those in the last stages of terminal diseases, people
with Lugariks Disease etc,
· How does the Federal Government know who is employed and
who is unemployed and who is unemployed and is seeking
gainful employment and who isn’t?
· The Bureau of Labor Statistics or BLS Monthly Household
Surveys which are done to monitor the ups and downs in the
composition of the LF and particularly the unemployed viz. who
is in and who is out of the LF.

4. 2
TOPIC: THE NATIONAL INCOME ACCOUNTING SYSTEM
(NIAS) OR THE SYSTEM OF NATIONAL INCOME AND
PRODUCT ACCOUNTS (NIPA)
STRUCTURE OF PRESENTATION:
· DEFINITION OF THE NIAS OR NIPA
· WHAT IS THE SIGNIFICANCE OF THE NIAS OR NIPA IN
A COUNTRY’S ECONOMY?
· PURPOSES OR FUNCTIONS OF THE NIAS OR NIPA:
· PRESENTATION AND EXAMINATION OF SOME KEY
MACROECONOMIC INDICATORS, AGGREGATES OR
INDICES USED TO MEASURE THE PERFORMANCE OF A
COUNTRY’S ECONOMY:
· GDP
· GDP PER CAPITA
· GNP
· GNP PER CAPITA
· CAPITAL STOCK
· CAPITAL CONSUMPTION ALLOWANCES OR
DEPRECIATION COSTS OF CAPITAL STOCK OR “WEAR
AND TEAR COSTS”
· NDP
· NDP PER CAPITA
· NNP
· NNP PER CAPITA
· RATE OF INVESTMENT
· RATE OF SAVINGS
· RATE OF UNEMPLOYMENT
· RATE OF EMPLOYMENT
· RATE OF UNDEREMPLOYMENT
· RATE OF INFLATION
· RATE OF DEFLATION
· PRICE INDEX
· RETAIL SALES

5. · RATE OF RETAIL SALES
· HOUSING STARTS
· RATE OF HOUSING STARTS ETC
THE MAIN OBJECTIVES OF CLASS:
TO PROVIDE A DEFINITION OF THE NIAS OR THE SNIPA
TO EXPLAIN THE SIGNIFICANCE OF THE NIAS OR THE
SNIPA
PURPOSES OR FUNCTIONS OF THE NIPA OR THE SNIPA
TO PROVIDE DEFINITIONS OF THE MAJOR
MACROECONOMIC AGGREGATES IDENTIFIED IN THE
STRUCTURE OF OUR PRESENTATION:
DEFINITION OF GDP
DEFINITION OF GDP PER CAPITA
DEFINITION OF GNP
DEFINITION OF GNP PER CAPITA
EMPHASIZE THE DIFFERENCE BETWEEN THE
FOLLOWING INDICATORS:
GDP AND GNP
GDP PER CAPITA AND GNP PER CAPITA
THE SIGNIFICANCE OF DOMESTIC RESIDENTS V
NATIONALS OR CITIZENS IN APPRECIATING THESE
CONCEPTUAL DIFFERENCES
DEFINITION OF CAPITAL STOCK
DEFINITION OF CCAS
DEFINITION OF NDP
DEFINITION OF NDP PER CAPITA
DEFINITION OF NNP
DEFINITION OF NNP PER CAPITA
DEFINITION OF RATE OF INVESTMENT
DEFINITION OF RATE OF SAVINGS
DEFINITION OF RATE OF UNEMPLOYMENT
DEFINITION OF RATE OF EMPLOYMENT
DEFINITION OF RATE OF UNDEREMPLOYMENT
DEFINITION OF RATE OF INFLATION
DEFINITION OF RATE OF DEFLATION
DEFINITION OF PRICE INDEX

6. DEFINITION OF RETAIL SALES
DEFINITION OF RATE OF RETAIL SALES
DEFINITION OF HOUSING STARTS
DEFINITION OF RATE OF HOUSING STARTS ETC
DEFINITIONS OF MAJOR MACROECONOMIC
AGGREGATES OR INDICATORS
The National Income Accounting System (NIAS):
What is the NIAS? The NIAS is a book-keeping or accounting
system that keeps track of (or records) the performance of a
country’s economy as measured by the major macroeconomic
aggregates of the economy such as GDP, GDP Per Capita, GNP,
GNP Per Capita, Capital Consumption Allowances, Rate of
Inflation etc.
· WHAT IS THE SIGNIFICANCE OF THE NIAS OR NIPA IN
A COUNTRY’S ECONOMY?
· PURPOSES OR FUNCTIONS OF THE NIAS OR NIPA:
· What are the main objectives of the NIAS?
· To measure and monitor the health of a country’s economy
· To compare the performance of different economies in the
global economy to determine their relative progress 2
· To provide economic data for various interest groups such as
labor unions, feminist groups, business groups, student groups
and others to defend their economic interests
· To provide economic data for Prime Ministers/Presidents and
their governments that are used to prepare briefings, speeches
etc. for these governments on the US/International economies
· To track the changes in price, output and employment in a
country’s economy

7. · What are the definitions of these macroeconomic aggregates
or indicators? Key Definitions:
· GDP: is the total monetary value of final goods and services
that are produced by the citizens of a country and the foreign
citizens who reside within the geographic boundaries of a given
country in a given year. • Example GDP in the US in 1992 was
an estimated $10T
· The US federal government stopped using the GNP and began
using the GDP as the main indicator to measure the performance
and progress of the US economy in 1992
· GNP: is the total monetary value of final goods and services
that are produced exclusively by the citizens of a country
whether they reside within their own country or in foreign
countries in a given year.
· Why was the decision to embrace the GDP and reject the GNP
as the main indicator to measure the performance and size of the
US economy taken in 1992?
· The short answer is that when measured by the GNP the US
economy showed a rosy picture but when measured by the GDP
the US economy was in trouble. The reason for this is that the
US oil companies and other US companies operating abroad
were doing very well i.e. making huge profits. Since their
incomes are included in the US GNP the actual performance of
the US economy was overstated.
· DEFINITION OF GROSS DOMESTIC PRODUCT OR GDP:
IS DEFINED AS THE TOTAL MONETARY VALUE OF ALL
FINAL AND LEGITIMATELY PRODUCED GOODS AND
SERVICES THAT ARE PRODUCED BY THE DOMESTIC
RESIDENTS WITHIN THE GEOGRAPHICAL BOUNDARIES
OF A COUNTRY USUALLY IN A YEAR.

8. · GDP = DOMESTIC PRODUCTION
· DEFINITION OF DOMESTIC RESIDENTS OF A COUNTRY
= THE CITIZENS + FOREIGNERS WHO LIVE AND WORK
WITHIN THE GEOGRAPHICAL FRONTIERS OF A
COUNTRY
ALTERNATIVELY EXPRESSED, A COUNTRY’S GDP = C +
Ig + G + X-M
WHERE:
C = AGGREGATE CONSUMPTION EXPENDITURES=
DURABLE CONSUMPTION EXPENDITURES + NON-
DURABLE CONSUMPTION EXPENDITURES +
EXPENDITURES ON SERVICES
Ig=BUSINESS INVESTMENT EXPENDITURES +
RESIDENTIAL INVESTMENT EXPENDITURES + CHANGES
IN INVENTORIES
G=AGGREGATE GOVERNMENT
EXPENDITURES=FEDERAL GOVERNMENT
EXPENDITURES + STATE GOVERNMENT EXPENDITURES
+ LOCAL GOVERNMENT EXPENDITURES
X= AGGREGATE EXPORT EARNINGS
M=AGGREGATE IMPORT EXPENDITURES
· DEFINITION OF GDP PER CAPITA=$GDPPOPULATION
OF DOMESTIC RESIDENTS IN A YEAR
=$16,500,000,000,000310,000,000 =$52,225 IN A YEAR
· GDP PER CAPITA IS ALSO CALLED AVERAGE INCOME
OR PER CAPITA INCOME
· DEFINITION OF GROSS NATIONAL PRODUCT OR GNP:
IS DEFINED AS THE TOTAL MONETARY VALUE OF ALL
FINAL AND LEGITIMATELY GOODS AND SERVICES THAT
ARE PRODUCED BY THE NATIONALS OF A COUNTRY (i.e.
the CITIZENS) OF A COUNTRY WHETHER THEY PRODUCE
THEM DOMESTICALLY WITHIN THE GEOGRAPHICAL

9. BOUNDARIES OF THEIR COUNTRY OR IN OTHER
COUNTRIES IN A YEAR.
· GNP =NATIONAL PRODUCTION
FOR EXAMPLE, AMERICA’S GNP =THE TOTAL VALUE OF
GOODS AND SERVICES PRODUCED BY AMERICAN
WORKERS AND FIRMS WITHIN THE BOUNDARIES OF
AMERICA + THE TOTAL MONETARY VALUE OF GOODS
AND SERVICES PRODUCED BY AMERICAN WORKERS
AND FIRMS IN OTHER COUNTRIES IN A YEAR.
· DEFINITION OF GNP PER CAPITA =$GNPPOPULATION
OF CITIZENS IN A YEAR
· DEFINITION OF CAPITAL STOCK: IS DEFINED AS THE
TOTAL MONETARY VALUE OR MARKET VALUE OF ALL
THE PHYSICAL CAPITAL STOCK IN A COUNTRY SUCH AS
MACHINERY, TOOLS, EQUIPMENT, BUILDINGS,
NETWORK OF ROADS, BRIDGES, WATER SUPPLY
SYSTEMS, TRANSPORTATION SYSTEMS,
TELECOMMUNICATION SYSTEMS, SEWAGE SYSTEMS,
ELECTRICAL GRIDS ETC THAT REPEATEDLY
PARTICIPATE IN THE PRODUCTIONDISTRIBUTION OF
GOODS AND SERVICES IN A YEAR.
· DEFINITION OF CAPITAL CONSUMPTION ALLOWANCES
OR CCAS: IS DEFINED AS THE TOTAL MONETARY
VALUE OF THE DEPRECIATION COSTS OR “WEAR AND
TEAR COSTS” OF THE CAPITAL STOCK OF A COUNTRY
THAT AS A RESULT OF ITS REPEATED USE IN THE
PRODUCTION AND DISTRIBUTION OF GOODS AND
SERVICES IN AN ECONOMY LOSE ITS VALUE DURING A
GIVEN YEAR.
· DEFINITION OF NET DOMESTIC PRODUCT OR
NDP=$GDP - $CCAs

10. Equation 1> NDP = GDP- CCAS
Equation 2> GDP = C + I g + G + X-M
Equation 3> NDP = C + I g + G + X-M-CCAs
Equation 4> NDP = C + (Ig-CCAs) + G + X-M
Equation 5>In = Ig -CCAs
Equation 5> NDP = C + In + G + X-M
$NDP < $GDP> $CCAs
· DEFINITION OF NDP PER CAPITA =$NDPPOPULATION
OF DOMESTIC RESIDENTS IN A YEAR
· DEFINITION OF NET NATIONAL PRODUCT OR NNP=
$GNP - $CCAs
· DEFINITION OF NNP PER CAPITA =$NNPPOPULATION
· DEFINITION OF RATE OF INFLATION = (PRICE INDEX
CP - PRICE INDEX PP)PRICE INDEX PP X 100
· DEFINITION OF RATE OF DEFLATION> SAME FORMULA
AS RATE OF INFLATION (EXPLANATION REQUIRED)
· DEFINITION OF RATE OF INVESTMENT = $Ig$GDP X
100
· DEFINITION OF RATE OF SAVINGS = $S$GDP X 100
· DEFINITION OF RATE OF EMPLOYMENT =# OF
EMPLOYED# IN LABOR FORCE X 100

11. · DEFINITION OF RATE OF UNEMPLOYMENT =# OF
UNEMPLOYED# IN LABOR FORCE X 100
· DEFINITION OF RATE OF UNDEREMPLOYMENT =# OF
UNDEREMPLOYED# IN LABOR FORCE X 100
· Transfer Payments: are defined asthe one sided transfer of
funds from the budget to a group of people who qualify for them
ie they are not required to repay these funds. Some examples of
transfer payments are unemployment compensation, welfare
programs such as food stamps, subsidized housing, MEDICAID,
MEDICARE and others.
· Personal Income =NI-Corporate Taxes –SS Taxes –UDC
Profits + Transfer Payments +-Net Interest EarningsNet
Interest Payments
· Disposable Income =PI -Taxes
· Gross Investment =Net Investment + CCAs
· Net Investment =Gross Investment -CCAs
· Capital Consumption Allowances or Depreciation Costs
There are three (3) conventional methods that are used to
calculate the monetary value of a country’s GDP or GNP. •
These three (3) methods are:
1. The Expenditure Method
2. The Income or Value-Added Method
3. The Output Method
What is the expenditure method?
The expenditure method is the aggregation or summation of all
the expenditure variables or elements that make up a nation’s
GDP or GNP whether in a closed or open economy i.e.
Y=GDP=C+I+G+X-M---The case of an open economy C=$650b

12. I=$210b G=$420 X=$40b M=$25b. Therefore by substitution of
the above monetary values for the domestic and net export
sectors we get: Y=GDP=C+I+G+X-
M=$650b+$210b+$420b+$40b-$25b=$1295b For your practice:
(a)What would be the monetary value of the GDP or GNP of a
country with a closed economy model where Y=C+I? (b)What
would be the monetary value of the GDP or GNP of a country in
an open economy model where GDP=C+I+X-M? 10 (c) What
would be the monetary value of the GDP or GNP of a country in
an open economy model where GDP=C+G+X-M where all the
numbers above remain the same except M=-$10b?
What is the Income method?
The income method is the aggregation or summation of all the
income variables or elements that make up a nation’s GDP or
GNP or NI whether in a closed or open economy. In other words
the income method focuses on the computation of all incomes in
a country’s economy or the national income. Thus if we define
Y=GDP and GDP=NI→Y=NI Therefore by deduction
Y=W/S+P+R+I Where: W/S=Wages/Salaries accrue to all
categories of workers (manual/intellectual) P=Profits accrue to
capitalists or owners of capital R=Rents accrue to landlords or
owners of lands, buildings etc. I=interest payments on dividends
accrue to (owners of financial assets egs. stocks, savings
accounts, bonds etc.)
Suppose: W/S=$860b P=$980b R=$490b I=$185b By
substitution of the above monetary values the NI for the
economy in question becomes:
Y=NI=W/S+P+R+I=$860b+$980b+$490b+$185b=$2515b or 11
Y=NI=$2.515t/yr=NDPfc -Why? Who remembers why
NI=NDPfc? Hint 1992???
What is the Output method?
The output method is the aggregation or summation of the
actual output of final goods/services that are produced yearly in
a nation’s economy ie GDP or GNP whether in a closed or open
economy. In other words the output method focuses on the
computation of the respective levels of output from all the

13. legitimate sectors that make up a country’s economy or the
national income. For example let’s assume that the US economy
is made up of six (6) sectors:
THE OUTPUT METHOD IN THE 199X
SECTOR
OUTPUT in $BILLIONS
MANUFACTURE
$250b
AGRICULTURE
$500b
TRANSPORT
$656b
EDUCATION
$765b
HEALTH CARE
$975b
FINANCE
$985b
TOTAL = GDP
$4131b
Conclusion: The GDP of any country calculated by all three (3)
methods ie (a)Expenditure (b) Income and (c)Output are
expected to be equal in theory though in practice they are
usually off by a few $ billion.
What alternatives exist to the GDP as a measure of economic
activity or economic performance?
The following are a few of the indices that exist as alternatives
to the GDP:
• HDI or Human Development Index (United Nations)
• MEW or Measure of Economic Welfare (James Tobin/Robert
Nordhaus)
• GPI or Gross Progress Indicator (Cobb/Halstead) among
others
How do the above indices improve upon the GDP or GNP?

14. • PDI=GPI-IT-NTP • NDI=NI-IT
Key: PDI=Personal Disposable Income GPI=Gross Personal
Income or Personal Income IT=Income Taxes 13 NTP=Non-Tax
Payments NDI=National Disposable Income NI=National
Income
Table-Value Added in Production of 1 gallon of Gasoline
Stage of Production
Value of Sales
Value Added
1. Oil Drilling
$1.50
$1.50
2. Refining
$0.80
$0.70
3. Shipping
$1.00
$0.20
4. Retail Sale
$3.00
$2.00
Total Value Added
$6.30
$4.40
· The domestic economy or domestic sector and
· The international or external economy or international or
external sector
· So what are the constituents of the domestic economy or
domestic sector?
· The domestic economy or sector of an open economy is made
up of the following sectors: Y=GDP=C+I+G---or domestic
absorption sectors or variables

15. · What are the components of the international or external trade
sector?
· This sector of an economy is made up of X-M or Net exports
· What is an open economy? 5 An open economy is defined as
an economy with an international or external trade or net export
or BOP sector.
The international or external trade or net export or BOP sector
is defined as X-M whereas earlier explained X=Export sector
and M=Import sector.
Thus X-M=Net export sector or international trade or export or
BOP sector.
There are three (3) possibilities for the relationship between X
and M in an open economy.
These possibilities are:
• Where X>M---BOT surplus or surplus on the external trade
account
• Where X<M---- BOT deficit or deficit on the external trade
account
• Where X=M---- BOT equilibrium or equilibrium on the
external trade account
Macroeconomic aggregates or indicators such as GDP, GNP,
GDP Per Capita, GNP Per Capita, NDP, NNP and many others
can be expressed in two ways, namely, in Real or Constant
dollars or in Nominal, Current or Money terms.
So what is Real or Constant Dollars?
When macroeconomic aggregates like GDP and others are
expressed in real or constant dollars it means that
macroeconomists adjust them for changes in the price level or
inflation i.e. macroeconomists exclude the effect of price
changes on these aggregates or indicators.
So what is Nominal or Current Dollars?
When macroeconomic aggregates like GDP and others are
expressed in nominal or current dollars it means that

16. macroeconomists do not adjust them for changes in the price
level or inflation i.e. macroeconomists do not exclude the effect
of price changes on these aggregates or indicators.
Thus to convert a nominal or current macroeconomic aggregate
to a real or constant aggregate i.e. to deflate them of inflation,
we must use the following general formula:
Real $X= Nominal $XPrice Index x 100
2
(Objective#3)To explain and interpret the following concepts
with examples:
•Rate of Employment v Employment
Rate of Employment = #persons employed x 100
#Labor Force
So if 90m persons are employed in a country’s LF and the LF is
made up of 120m persons, then the rate of employment =
90m120m x 100= 75%
Hence the rate of employment =75% of the LF. Thus, the rate of
employment is the percentage of the LF of a country that is
employed (in this case 75%) while employment is the absolute #
of persons (in our example 90 m persons) who are employed i.e.
who have jobs whether full time, part time, self-employed or
even underemployed, the BLS counts all those with jobs
whether they work in the public or private sector.

17. •Rate of Unemployment v Unemployment
Rate of Unemployment = #persons unemployed x 100
#Labor Force
Thus, if 10m persons are unemployed in a country’s LF and the
LF is made up of the same 120m persons, then the rate of
unemployment =
10m120m x 100= 8%
So the rate of unemployment =8% of the LF. Thus, the rate of
unemployment is the percentage of the LF of a country that is
unemployed (in this case 8%) while unemployment is the
absolute # of persons (in our example 10m) who are
unemployed i.e. who have no jobs though to be counted in the
LF by the BLS, they must be actively searching gainful
employment.
•Rate of Underemployment v Underemployment
Rate of Underemployment = #persons underemployed x 100
#Labor Force
Thus, if 20m persons are underemployed in a country’s LF and
the LF is made up of the same 120m persons, then the rate of
underemployment =
20m120m x 100= 17%
So the rate of underemployment =17% of the LF. Thus, the rate
of underemployment is the percentage of the LF of a country
that is unemployed (in this case 17%) while underemployment
is the absolute # of persons (in our example 20m) who are

18. underemployed i.e. who are working at jobs for which they are
much more qualified, for example a BSc in Chemistry working
at a local McDonald as a cashier. The underemployed are
counted by the BLS in a country’s LF as being gainfully
employed.
•Rate of Labor Force Participation or RLFP v Labor Force
Participation or LFP
RLFP = # personas in LF/# personas of working age X 100
So whereas the RLFP is a percentage of different groups of
people who participate in the LF by gender, race, ethnicity,
religion, education etc. who are of working age in the US (16
years or older), the LFP is the absolute# of personas in these
different groups who participate in the LF of a country.
DEFINITIONS OF MAJOR MACROECONOMIC
AGGREGATES OR INDICATORS
· DEFINITION OF GROSS DOMESTION PRODUCT OR GDP:
IS DEFINED AS THE TOTAL MONETARY VALUE OF ALL
FINAL AND LEGITIMATELY PRODUCED GOODS AND
SERVICES THAT ARE PRODUCED BY THE DOMESTIC
RESIDENTS WITHIN THE GEOGRAPHICAL BOUNDARIES
OF A COUNTRY USUALLY IN A YEAR.
· GDP = DOMESTIC PRODUCTION
· DEFINITION OF DOMESTIC RESIDENTS OF A COUNTRY
= THE CITIZENS + FOREIGNERS WHO LIVE AND WORK

19. WITHIN THE GEOGRAPHICAL FRONTIERS OF A
COUNTRY
ALTERNATIVELY EXPRESSED, A COUNTRY’S GDP = C +
Ig + G + X-M
WHERE:
C = AGGREGATE CONSUMPTION EXPENDITURES=
DURABLE CONSUMPTION EXPENDITURES + NON-
DURABLE CONSUMPTION EXPENDITURES +
EXPENDITURES ON SERVICES
Ig=BUSINESS INVESTMENT EXPENDITURES +
RESIDENTIAL INVESTMENT EXPENDITURES + CHANGES
IN INVENTORIES
G=AGGREGATE GOVERNMENT
EXPENDITURES=FEDERAL GOVERNMENT
EXPENDITURES + STATE GOVERNMENT EXPENDITURES
+ LOCAL GOVERNMENT EXPENDITURES
X= AGGREGATE EXPORT EARNINGS
M=AGGREGATE IMPORT EXPENDITURES
· DEFINITION OF GDP PER CAPITA =$GDPPOPULATION
OF DOMESTIC RESIDENTS IN A YEAR
=$16,500,000,000,000310,000,000 =$52,225 IN A YEAR
· GDP PER CAPITA IS ALSO CALLED AVERAGE INCOME
OR PER CAPITA INCOME
· DEFINITION OF GROSS NATIONAL PRODUCT OR GNP:
IS DEFINED AS THE TOTAL MONETARY VALUE OF ALL
FINAL AND LEGITIMATELY GOODS AND SERVICES THAT
ARE PRODUCED BY THE NATIONALS OF A COUNTRY (i.e.
the CITIZENS) OF A COUNTRY WHETHER THEY PRODUCE
THEM DOMESTICALLY WITHIN THE GEOGRAPHICAL
BOUNDARIES OF THEIR COUNTRY OR IN OTHER
COUNTRIES IN A YEAR.
· GNP =NATIONAL PRODUCTION

20. FOR EXAMPLE, AMERICA’S GNP =THE TOTAL VALUE OF
GOODS AND SERVICES PRODUCED BY AMERICAN
WORKERS AND FIRMS WITHIN THE BOUNDARIES OF
AMERICA + THE TOTAL MONETARY VALUE OF GOODS
AND SERVICES PRODUCED BY AMERICAN WORKERS
AND FIRMS IN OTHER COUNTRIES IN A YEAR.
· DEFINITION OF GNP PER CAPITA =$GNPPOPULATION
OF CITIZENS IN A YEAR
· DEFINITION OF CAPITAL STOCK: IS DEFINED AS THE
TOTAL MONETARY VALUE OR MARKET VALUE OF ALL
THE PHYSICAL CAPITAL STOCK IN A COUNTRY SUCH AS
MACHINERY, TOOLS, EQUIPMENT, BUILDINGS,
NETWORK OF ROADS, BRIDGES, WATER SUPPLY
SYSTEMS, TRANSPORTATION SYSTEMS,
TELECOMMUNICATION SYSTEMS, SEWAGE SYSTEMS,
ELECTRICAL GRIDS ETC THAT REPEATEDLY
PARTICIPATE IN THE PRODUCTIONDISTRIBUTION OF
GOODS AND SERVICES IN A YEAR.
· DEFINITION OF CAPITAL CONSUMPTION ALLOWANCES
OR CCAS: IS DEFINED AS THE TOTAL MONETARY
VALUE OF THE DEPRECIATION COSTS OR “WEAR AND
TEAR COSTS” OF THE CAPITAL STOCK OF A COUNTRY
THAT AS A RESULT OF ITS REPEATED USE IN THE
PRODUCTION AND DISTRIBUTION OF GOODS AND
SERVICES IN AN ECONOMY LOSE ITS VALUE DURING A
GIVEN YEAR.
· DEFINITION OF NET DOMESTIC PRODUCT OR
NDP=$GDP - $CCAs
Equation 1> NDP = GDP- CCAS
Equation 2> GDP = C + I g + G + X-M

21. Equation 3> NDP = C + I g + G + X-M-CCAs
Equation 4> NDP = C + (Ig-CCAs) + G + X-M
Equation 5>In = Ig -CCAs
Equation 5> NDP = C + In + G + X-M
$NDP < $GDP> $CCAs
· DEFINITION OF NDP PER CAPITA =$NDPPOPULATION
OF DOMESTIC RESIDENTS IN A YEAR
· DEFINITION OF NET NATIONAL PRODUCT OR NNP=
$GNP - $CCAs
· DEFINITION OF NNP PER CAPITA =$NNPPOPULATION
· DEFINITION OF RATE OF INFLATION = (PRICE INDEX
CP - PRICE INDEX PP)PRICE INDEX PP X 100
· DEFINITION OF RATE OF DEFLATION> SAME FORMULA
AS RATE OF INFLATION (EXPLANATION REQUIRED)
· DEFINITION OF RATE OF INVESTMENT = $Ig$GDP X
100
· DEFINITION OF RATE OF SAVINGS = $S$GDP X 100
· DEFINITION OF RATE OF EMPLOYMENT =# OF
EMPLOYED# IN LABOR FORCE X 100
· DEFINITION OF RATE OF UNEMPLOYMENT =# OF
UNEMPLOYED# IN LABOR FORCE X 100
· DEFINITION OF RATE OF UNDEREMPLOYMENT =# OF

22. UNDEREMPLOYED# IN LABOR FORCE X 100
•To explain some of the limitations of the Rates of Employment,
Unemployment and Underemployment
· These rates are averages and as such it’s necessary to be very
careful in how we interpret them. For example, if the Re =92%,
Ru = 3.4% and the Rund =4.6% in the US economy, what
exactly do these averages mean for the US economy?
First, the Re of 92% means that in the whole economy or the
macro-economy of the US if we randomly select 1,000 residents
across the US about 920 will have jobs whether full time jobs,
part time jobs, self-employed jobs or jobs at which they are
underemployed. It does not mean that in every state, city,
village and county across the US 92% of the labor force will be
employed as the rate of employment will probably be above
,below or equal to the national rate of employment in each state,
city etc.
Second, the Ru of 3.4% means that overall for the whole
economy, if 1,000 residents are randomly selected an estimated
30 residents will be unemployed nationally. However, it does
not mean that the Ru is 3.4% in each state, county and city as
the Ru is an average that varies above and below or equal to the
national rate of unemployment.
Third, the same thing is true for the Rund of 4.6%.
· Thus, we must always remember to avoid the fallacy of
composition whenever we interpret these averages for the labor
force i.e. we must remember that what’s true about the whole
economy is not necessarily true about the parts of the whole
economy such as the states, cities and counties that make up the
whole economy.

23. · Finally, the rates of employment and unemployment are
inversely related and as discussed earlier discouraged or
marginalized workers who are not counted by the BLS’ monthly
Household Surveys will likely cause the monthly rate of
unemployment to rise or fall depending on the # of discouraged
workers and hence will cause the rate of employment to also
fluctuate. The latter fact therefore requires even more care in
interpreting these rates for the labor force!!
2
(4)To explain the Causes of Unemployment or Types of
Unemployment:
•Frictional Unemployment or FU
FU is defined as the “normal turnover” in a country’s labor
force i.e. FU is the transition of workers from one job A to
another job B over a given time period say 3 months or 6
months or 1 year. So for example, if a cook, a pilot or an
accountant resigns from one job A and it takes him or her 6
months to find another job B, then during those 6 months of
transitioning from job A to job B the cook. Pilot or accountant
would be frictionally unemployed. FU will always exist because
it is expected that for all kinds of reasons: personal,
professional, family, medical etc., workers will switch from one
job to another. Hence, FU is considered to be the “normal
turnover of the labor force” in every country.

24. •Structural Unemployment or SU
SU is another type of unemployment that is caused by the
mismatch that exists between the jobs that are available in a
country’s economy and the skill sets that are available to
perform the available jobs. So for example, suppose in the US
economy in a given year there are 20,000 jobs that are available
for mechanical engineers and there are simultaneously say,
8,000 architects who are unemployed in the economy. Those
8,000 architects would be considered to be structurally
employed because jobs are available to be filled but architects
are not mechanically engineers and as such they are not
equipped with the necessary skills to perform or match the jobs
that are available in the economy. The opposite would be
equally valid, namely, if 20,000 jobs were available for
architects and say 10,000 mechanically engineers were
unemployed. Here, the mechanical engineers would be
structurally unemployed as jobs are available but the
unemployed mechanical engineers do not have the skill sets to
do the available jobs of architects.
It's also important to note that sometimes SU results in an
economy when firms shift jobs from one geographic locality to
another. For example, if a glass cutting plant relocates its
operation from say Fairfax County to Loss Angeles or China or
India etc., the glass cutters who even if they are invited by the
company’s management to relocate to LA or China or India, if
for whatever reason, family etc. they cannot relocate, they
would become structurally unemployed because potentially their
skills as glass cutters would become redundant if there are no
jobs available for them as glass cutters though other jobs are
available such as bus drivers, welders, AC technicians etc.
Hence, they would require retraining as their skills as glass
cutters would not match the skill sets required for the available
jobs.

25. •Technological Unemployment or TU
TU is another type of unemployment which results in an
economy when machines, robots, computers, automation such as
automated telephone systems etc. replace or substitute for
human labor. For example, when robots replace human welders
in auto plants, or when self-check-out machines or ATMs
replace bank tellers etc. such workers who are replaced by these
technological gadgets are said to be technologically unemployed
thus resulting in technological unemployment. AI or artificial
intelligence is creating all kinds of disruption in the global
labor force and is forecasted to displace millions of workers
global with driverless cars and other AI technologies. The
critical question seems to be, will each economy and the global
economy be able to grow fast enough to absorb through
retraining etc. the workers displaced by AI. In other words, will
AI and other technologies be net killers of jobs or net creators
of jobs globally and in each economy?
•Cyclical Unemployment or CU
CU is the type of unemployment that is the result of the
periodic downturn or bust in the business cycle of market
economies or capitalist economies due to a significant
weakening of demand for cars, houses, foods, clothing,
education, health care and a range of other goods and services
that inevitably result in these economies due to layoffs,
furlough, more part-time labor etc. during such downturns in the
business cycle that result from recession and depression. Thus,
auto workers, construction workers, sales agents etc. who lose
their jobs during such downturns are said to be cyclically
unemployed in an economy. However, once the economy
recovers and starts to grow again through the appropriate fiscal
and monetary policies, those cyclically unemployed workers or
several of them are likely to find jobs again sometimes with
their former or new employers.

26. •Seasonal Unemployment or SeU
SeU is the type of unemployment that results in a country’s
labor force due to the seasonal changes in the demand for some
types of labor that are sensitive to changes in the seasons that
are inherent in a calendar year. So for example, during the
summer season in any calendar year, the demand for the labor
services of life guards at swimming pools at hotels, beaches,
apartment complexes etc. will be high. Likewise, during the
summer season, the demand for the labor services of
construction workers will be higher than in the winter season
because it is so much more favorable and pleasant to dig the
foundation for buildings or to do roof work or exterior paintings
than in the winter when the temperature maybe-10 ºF. On the
contrary, during the winter season, the demand for the labor
services of life guards and construction workers will decline
(fall) and the demand for the labor services of ski operators,
snow blowers, snow cleaners etc. There is also an increased
demand for the labor services of college and high school
students on Christmas break by retail stores and other
businesses who are then let go as they return to college/school
after the Christmas break.
•Classical Unemployment:
(a)Voluntary Unemployment or VU
VU is one type of Classical Unemployment that results in a
capitalist market economy whenever the price of labor or the
wage rate is set below the market equilibrium wage rate in labor
markets, thus creating more demand for labor say of carpenters
by households, hospitals, schools etc. than the supply of labor
by carpenters given that the price of labor will stimulate more
demand and less supply in keeping with the universal laws of
demand and supply. Thus, VU results in a country’s labor
market when workers such as carpenters and others believe that

27. the wage rate set by market forces (employers and employees)
below the market equilibrium wage rate is too low and is
therefore not “worth their while” to supply “too much of their
labor.” Hence, though they can find more jobs because
employers are will to employ more of them, they withhold the
supply of their labor as if they are volunteering to be
unemployed. Hence, the term used to describe this type of
unemployment being Voluntary Unemployment or VU! See
Supply-Demand Model for Carpenters’ labor.
(b)Involuntary Unemployment or IU
IU is another type of Classical Unemployment that results in a
capitalist market economy whenever the price of labor or the
wage rate is set above the market equilibrium wage rate in labor
markets, thus creating more supply for labor say of carpenters
by carpenters than the demand of the labor services of
carpenters by employers in households, schools etc. given that
the price of labor will stimulate more supply and less demand in
keeping with the universal laws of supply and demand. Thus, IU
results in a country’s labor market when workers such as
carpenters and others believe that the wage rate set by market
forces (employers and employees) above the market equilibrium
wage rate is sufficiently high to incentivize them to suppl y
much more of their labor which results in a surplus of labor in
labor markets. Consequently, IU results when workers like
carpenters are willing to work at the higher wage rate set above
the market equilibrium though they are unable to find enough
jobs given the lower demand for their labor services by
employers who are willing to employ much less than those who
are willing to work. Hence, the term used to describe this type
of unemployment being Involuntary Unemployment or IU! See
Supply-Demand Model for Carpenters’ labor.
•The Natural Rate of Unemployment or NRU=FU + SU

28. The NRU is simply put the type of unemployment which exists
when an economy is said to be at full employment i.e. when an
economy is operating at its full employment level which means
that it is operating at the point of its full utilization capacity or
the capacity for which an economy is engineered to operate.
Thus, the NRU is the sum total of two earlier discussed types of
unemployment, namely, structural unemployment or SU and
frictional unemployment or FU both of which exists even when
an economy is operating at full employment i.e. even at full
employment when an economy operates on its PPFC there will
be unemployment which results from the mismatch between
available skills and available jobs or SU on the one hand as well
as workers in transition between jobs or FU.
TOPIC: INFLATION
DEFINITION OF INFLATION
INFLATION IS TYPICALLY DEFINED AS THE SUSTAINED
OR PERSISTENT INCREASE IN THE GENERAL, AVERAGE
OR OVERALL PRICE LEVEL FOR GOODS AND SERVICES
IN A COUNTRY’S ECONOMY OVER TIME. IN OTHER
WORDS, INFLATION OCCURS IN AN ECONOMY WHEN
THE PRICES OF GOODS AND SERVICES SHOW A
PATTERN OF INCREASES ON AVERAGE. THUS, DURING
AN INFLATIONARY PERIOD IN AN ECONOMY SOME
PRICES MAY FALL, SOME MAY BE FLAT I.E. THEY
NEITHER INCREASE OR DECREASE THOUGH ON
AVERAGE THE TREND IS THAT PRICES ARE GOING UP
NOT DOWN OR FLAT.
SO IT’S IMPORTANT TO EMPHASIZE THAT INFLATION
DOES NOT MEAN THAT THE PRICES OF ALL GOODS AND
SERVICES ARE RISING IN A SUSTAINED WAY SINCE
SOME PRICES MAY FALL AND OTHERS REMAIN FLAT SO

29. LONG AS THE TREND LINE SHOWS THAT PRICES ARE
RISING IN A SUSTAINED WAY AS A PATTERN OVER
TIME.
RATE OF INFLATION
THE RATE OF INFLATION IS DEFINED AS THE RATE OR
PACE AT WHICH PRICES FOR GOODS AND SERVICES I.E.
THE GENERAL PRICE LEVEL OR THE AVERAGE PRICES
FOR GOODS AND SERVICES INCREASES OVER TIME. THE
RATE OF INFLATION UNLIKE INFLATION IS ALWAYS
EXPRESSED IN RELATIVE OR PERCENTAGE TERMS SUCH
AS 5%, 10%, 25% OR 100% PER MONTH, PER QUARTER OR
PER YEAR.
THUS INFLATION AND THE RATE OF INFLATION WHILE
THEY ARE RELATED, THEY ARE NOT SYNONYMS, I.E.
THEY ARE NOT THE SAME CONCEPTS. SO THEY SHOULD
NEVER BE USED INTERCHANGEABLY.
DEFINITION OF DEFLATION
FIRST, DEFLATION IS THE VERY OPPOSITE OF
INFLATION.
SECOND, DEFLATION IS DEFINED AS THE SUSTAINED
OR PERSISTENT DECREASE IN THE GENERAL, AVERAGE
OR OVERALL PRICE LEVEL FOR GOODS AND SERVICES
IN A COUNTRY’S ECONOMY OVER TIME.
ALTERNATIVELY EXPRESSED, DEFLATION OCCURS IN
AN ECONOMY WHEN THE PRICES OF GOODS AND
SERVICES SHOW A PATTERN OF DECREASES ON
AVERAGE. IN OTHER WORDS, DURING A
DEFLATIONARY PERIOD IN AN ECONOMY SOME PRICES
MAY RISE, SOME MAY BE FLAT I.E. THEY NEITHER
INCREASE OR DECREASE THOUGH ON AVERAGE THE
TREND IS THAT PRICES ARE GOING DOWN NOT UP OR
FLAT.
THUS IT MUST BE EMPHASIZED THAT DEFLATION DOES
NOT MEAN THAT THE PRICES OF ALL GOODS AND
SERVICES ARE FALLING IN A SUSTAINED WAY SINCE

30. SOME PRICES MAY RISE AND OTHERS REMAIN FLAT SO
LONG AS THE TREND LINE SHOWS THAT PRICES ARE
FALLING IN A SUSTAINED WAY AS A PATTERN OVER
TIME.
THE RATE OF DEFLATION
THE RATE OF DEFLATION IS DEFINED AS THE RATE OR
PACE AT WHICH PRICES FOR GOODS AND SERVICES I.E.
THE GENERAL PRICE LEVEL OR THE AVERAGE PRICES
FOR GOODS AND SERVICES DECREASES OVER TIME.
THE RATE OF DEFLATION UNLIKE DEFLATION IS
ALWAYS EXPRESSED IN RELATIVE OR PERCENTAGE
TERMS SUCH AS 5%, 10%, 25% OR 100% PER MONTH, PER
QUARTER OR PER YEAR.
CONSEQUENTLY, DEFLATION AND THE RATE OF
DEFLATION WHILE THEY ARE RELATED, THEY ARE NOT
SYNONYMS, I.E.THEY ARE NOT THE SAME CONCEPTS.
SO THEY SHOULD NEVER BE USED INTERCHANGEABLY.
DEFINITION OF PRICE INDICES:
PRICE INDICES ARE METRICES OR INDICATORS THAT
MEASURE THE AVERAGE UPS AND DOWNS I.E. THE
AVERAGE FLUCTUATIONS IN THE GENERAL OR
AVERAGE PRICE LEVEL FOR GOODS AND SERVICES IN A
COUNTRY’S ECONOMY OVER TIME. PRICE INDICES ARE
THEREFORE USED TO MEASURE INFLATIONARY AND
DEFLATIONARY TRENDS IN ANY COUNTRY’S ECONOMY
OVER TIME.
SOME OF THE MOST POPULAR PRICE INDICES ARE:
· CPI=CONSUMER PRICE INDEX: IS A MEASURE OF THE
AVERAGE MOVEMENT OF CONSUMER PRICES (FOODS,
CLOTHING, HEALTH CARE, EDUCATION, ELECTRONIC
GADGETS, SHOES ETC) IN A COUNTRY’S ECONOMY
OVER TIME.
· PPI=PRODUCER PRICE INDEX: IS A MEASURE OF THE
AVERAGE MOVEMENT OF PRODUCERS’ PRICES (RAW

31. MATERIALS, ENERGY, LABOR, CAPITAL, SEMI-
PROCESSED INPUTS ETC) IN A COUNTRY’S ECONOMY
OVER TIME.
· WPI=WHOLESALE PRICE INDEX: IS A MEASURE OF THE
AVERAGE MOVEMENT OF WHOLESALE PRICES FOR
(CARS, FOODS, CLOTHES BOUGHT BY WHOLESALERS
FROM MANUFACTURERS ETC) IN A COUNTRY’S
ECONOMY OVER TIME.
· RPI=RETAIL PRICE INDEX: IS A MEASURE OF THE
AVERAGE MOVEMENT OF RETAIL PRICES (CARS,
FOODS, CLOTHES BOUGHT BY CONSUMERS FROM
RETAILERS ETC) IN A COUNTRY’S ECONOMY OVER
TIME.
· GDP DEFLATOR OR IMPLICIT PRICE DEFLATOR: IS A
MEASURE OF THE AVERAGE MOVEMENT OF ALL PRICES
SUCH AS CONSUMERS, PRODUCERS, WHOLESALES’,
RETAILS, EXPORT AND IMPORT PRICES OF ALL FINAL
AND LEGITIMATELY PRODUCED GOODS AND SERVICES
THAT ARE INCLUDED IN A COUNTRY’S GDP IN OVER
TIME.
· EPI=EXPORT PRICE INDEX: IS A MEASURE OF THE
AVERAGE MOVEMENT OF THE PRICES OF GOODS AND
SERVICES THAT ARE EXPORTED FROM ONE COUNTRY
TO THE ROW IN A COUNTRY’S ECONOMY OVER TIME.
· IPI=IMPORT PRICE INDEX: IS A MEASURE OF THE
AVERAGE MOVEMENT OF THE PRICES OF GOODS AND
SERVICES THAT ARE IMPORTED TO ONE COUNTRY
FROM THE ROW IN A COUNTRY’S ECONOMY OVER
TIME.
FORMULA TO CALCULATE THE RATE OF INFLATION

32. AND THE RATE OF DEFLATION:
Ri =(PRICE INDEX in CP – PRICE INDEX in PP)/ PRICE
INDEX in PP X 100
Ri>0→PRICE INDEX in CP > PRICE INDEX in PP
Rd<0→PRICE INDEX in CP < PRICE INDEX in PP
FORMULA TO CALCULATE THE RATE OF INFLATION
AND THE RATE OF DEFLATION USING THE CPI AS A
MEASURE OF INFLATIONDEFLATION:
SUPPOSE WE ASSUME THE FOLLOWING SITUATION FOR
A HYPOTHETICAL ECONOMY:
Ri=RATE OF INFLATION
TIME SERIES = 1995-2005
CP=CURRENT PERIOD=2005
PP=PREVIOUS PERIOD=1995
CPI 2005= 180
CPI 1995 =160
APPLYING THE FORMULA FOR THE Ri=RATE OF
INFLATION FOR 1995-2005 USING THE CPI AS THE PRICE
INDEX TO MEASURE INFLATION YIELDS:
Ri 1995-2005=(CPI 2005 – CPI 1995)CPI 1995 X 100
BY SUBSTITUTION, WE GET THE FOLLOWING:
Ri 1995-2005 = (180 -160)160 X 100
Ri 1995-2005 = 20160 X 100
Ri1995-2005= 12.5%>0- WHAT DOES IT MEAN? THAT
CONSUMERS’ PRICES AS MEASURED BY THE CPI
INCREASED ON AVERAGE BY NEARLY 13% BETWEEN
1995-2005!
Rd= RATE OF DEFLATION
TO CALCULATE THE Rd FOR THE SAME YEARS 1995-
2005, WE WOULD GET THE FOLLOWING USING AGAIN
THE CPI TO MEASURE DEFLATION:
Rd 1995-2005=(CPI 2005 – CPI 1995)CPI 2005 X 100
BY SUBSTITUTION, WE GET THE FOLLOWING:
Rd 1995-2005 = (160 -180)180 X 100
Rd 1995-2005 = -20180 X 100
Rd1995-2005= -11.11%<0 WHAT DOES IT MEAN? THAT

33. CONSUMERS’ PRICES AS MEASURED BY THE CPI
DECREASED ON AVERAGE BY NEARLY -11% BETWEEN
1995-2005!
· TYPES OF INFLATION
· MODERATE OR CREEPING INFLATION: IS DEFINED AS
THE TYPE OF INFLATION WHEREBY ON AVERAGE
PRICES FOR GOODS AND SERVICES OR THE GENERAL
PRICE LEVEL INCREASES BETWEEN (1%-4%) PER YEAR
IN AN ECONOMY.
· GALLOPING INFLATION: IS DEFINED AS THE TYPE OF
INFLATION WHEREBY ON AVERAGE PRICES FOR GOODS
AND SERVICES OR THE GENERAL PRICE LEVEL
INCREASES BETWEEN (10%-100%) PER YEAR IN AN
ECONOMY.
· HYPERINFLATION: IS DEFINED AS THE TYPE OF
INFLATION WHEREBY ON AVERAGE PRICES FOR GOODS
AND SERVICES OR THE GENERAL PRICE LEVEL
INCREASES BETWEEN (100%-1500%) PER YEAR IN AN
ECONOMY
· THE MACROECONOMIC SIGNIFICANCE OF
INFLATIONDEFLATION
· THE EROSION OF THE STANDARD OF LIVING OF
PEOPLE:
· INFLATION DECIMATES THE PURCHASING POWER OF
PEOPLE BY REDUCING THE VALUE OF THEIR WAGES
AND SALARIES BY WHATEVER THE RATE OF INFLATION
IS IN AN ECONOMY
· EXAMPLE IF THE RATE OF INFLATION IN AN
ECONOMY IS 10% PER YEAR AND THE AVERAGE

34. DISPOSABLE INCOME OF HOUSEHOLDS IS $80,000 PER
YEAR IN REAL DOLLARS, HOUSEHOLDS PURCHASING
POER WILL DECREASE BY $8,000. THUS, THOUGH
HOUSEHOLDS OR PEOPLE WILL HAVE $80,000 IN
NOMINAL DOLLARS (UNADJUSTED FOR INFLATION), IT
WILL PURCHASE FOODS, CLOTHING ETC WORTH ONLY
$72,000.
· INFLATION MAKES PEOPLE POORER, IT IS AN EQUAL
OPPORTUNITY TAX AND AS SUCH POLITICIANS BECOME
INTERESTED IN CURBING INFLATION VIA
FISCALMONETARY POLICY BECAUSE IT POSES A
THREAT TO THEIR POLITICAL CAREER AS THEIR
CONSTITUENTS BECOME POORER I.E. THE POLITICAL
ECONOMY OF INFLATION
· DEFLATION HAS THE VERY OPPOSITE EFFECT ON
HOUSEHOLD DISPOSABLE INCOME ASSUMING A 10%
RATE OF DEFLATION WOULD ACTUALLY INCREASE
THEIR PURCHASING POWER BY $8000 IN REAL DOLLARS
· THE EFFECT OF INFLATIONDEFLATION ON PROFITS:
· ASSUMING A 10% RATE OF INFLATION, IF THE
AVERAGE PROFITS OF BUSINESSES OR INVESTORS IS
$1,000,000, IN REAL DOLLARS (ADJUSTED FOR
INFLATION), IT WILL BE $900,000 THOUGH THE
INVESTORS WILL HAVE $1M IN PROFITS IN THEIR BANK
ACCOUNTS AND ACCOUNT BOOKS
· ON THE CONTRARY, A 10% RATE OF DEFLATION WITH
THE SAME BUSINESS PROFITS OF $1,000,000 WILL ADD
IN REAL DOLLARS $100,000 TO BUSINESS PROFITS
· THE IMPACT OF INFLATIONDEFLATION ON
INVESTMENT (PRODUCTIVE-FINANCIAL INVESTMENTS):

35. · INFLATION DIMINISHES THE INCENTIVE TO
INVESTMENT WHETHER IN FACTORIES, EXPANSION OF
FACTORY SPACE, TECHNOLOGICAL INNOVATIONS ETC
OR IN FINANCIAL MARKETS SUCH AS BONDS, STOCKS
ETC.
· SO A RATE OF INFLATION OF 10% WILL REDUCE A
CAPITAL INVESTMENT OF $10,000,000 IN A STEEL PLANT
OR IN THE BOND MARKET BY $1,000,000 I.E. IN REAL
DOLLARS, THE MARKET VALUE OF THE INVESTOR’S
CAPITAL WILL BE $9,000,000 INSTEAD OF $10,000,000.
· ON THE CONTRARY, A RATE OF DEFLATION OF 10%
WOULD HAVE THE OPPOSITE EFFECT ON INVESTMENT,
ADDING $1,000,000 TO THE MARKET VALUE OF A $10M
INVESTMENT WHETHER IN PRODUCTIVE OR FINANCIAL
INVESTMENTS
· THE IMPACT OF INFLATION-DEFLATION ON WAGES,
SALARIES, SAVINGS, GOVERNMENT SPENDING ETC.:
· A 10% RATE OF INFLATION REDUCES WAGES,
SALARIES, SAVINGS, GOVERNMENTSPENDING,
CONSUMPTION SPENDING AND OTHER NOMINAL
AGGREGATES IN REAL TERMS BY 10%
· A 10% RATE OF DEFLATION INCREASES WAGES,
SALARIES, SAVINGS, GOVERNMENT SPENDING,
CONSUMPTION SPENDING AND OTHER NOMINAL
AGGREGATES IN REAL TERMS BY 10%
· CAUSES OF INFLATION
· DEMAND-PULL INFLATION
· COST-PUSH INFLATION
· WAGE-PRICE SPIRAL

36. · EXCESSIVE GOVERNMENT SPENDING OR DEFICIT
FINANCING
· EXCESSIVE MONETARY EXPANSION OR EXCESSIVE
MONETARY GROWTH
1
Final Output of Economy in 2010
OUTPUT
QUANTITY
PRICE
VALUE OF FINAL Q
Coconut Milk
1 Million Gallons
$10/Gallon
$10Million
Wheat
2 Million Bushels
$4/Bushel
$8 Million

37. GDP
$18 Million
Final Output of Economy in 2011
OUTPUT
QUANTITY
PRICE
VALUE OF FINAL Q
Coconut Milk
1 Million Gallons
$20/Gallon
$20Million
Wheat
2 Million Bushels
$8/Bushel
$16 Million
GDP
$36 MILLION
NOMINAL GDP =∆P X ∆Q
REAL GDP= P X∆Q
PRICE DEFLATOR 2010 = NOMINAL GDPREAL GDP X 100
PRICE DEFLATOR 2010 =$18M$18M X 100 =100 2010
PRICE DEFLATOR 2011 = NOMINAL GDPREAL GDP X 100
PRICE DEFLATOR 2011 =$36M$18M X 100 =200 2011

38. Topic: The Labor Force and the Population in an Economy
The Main Objectives for this Class are:
(Objective#1)-To define and distinguish between the concepts
of the Labor Force or LF and the Population of a country
(Objective#2)-To explain the Significance of the LF in a
country’s economy
(Objective#3)-To explain and interpret the following concepts
with examples:
•Rate of Employment v Employment
•Rate of Unemployment v Unemployment
•Rate of Underemployment v Underemployment
•Rate of Labor Force Participation v Labor Force Participation
(Objective#4)-To explain the Causes of Unemployment or Types
of Unemployment:
•Frictional Unemployment or FU
•Structural Unemployment or SU
•Technological Unemployment or TU
•Cyclical Unemployment or CU
•Seasonal Unemployment or SeU

39. •Classical Unemployment:
(a)Voluntary Unemployment or VU
(b)Involuntary Unemployment or IU
•The Natural Rate of Unemployment or NRU=FU + SU
(Objective#5)-To explain some of the limitations of the Rates of
Employment, Unemployment and Underemployment
1